Galaxy Entertainment Group Limited (HKG:27) Stock Has Experienced Strong Momentum: Does This Require a Deeper Examination of Its Financial Prospects?

Galaxy Entertainment Group (HKG:27) stock is up a remarkable 49% in the last month. As most know, it is usually the fundamentals that guide market price movements over the long term. So today we decided to take a look at the company’s key financial indicators to see if they play a role in the recent price movement. In this article, we decided to focus on Galaxy Entertainment Group’s ROE.

Return on equity or ROE is an important factor that a shareholder must consider as it tells them how effectively their capital is being reinvested. In simple terms, it assesses the profitability of a company in relation to its equity capital.

Check out our latest analysis for Galaxy Entertainment Group

How do you calculate return on equity?

ROE can be calculated using the formula:

Return on equity = net profit (from continuing operations) ÷ equity

So, based on the above formula, the ROE for Galaxy Entertainment Group is:

11% = HK$8.4 billion ÷ HK$74 billion (Based on trailing twelve months to June 2024).

The “return” is the income the company earned last year. So this means that for every HK$ that its shareholders invest, the company makes a profit of HK$0.11.

Why is ROE important for earnings growth?

So far we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of these profits the company reinvests or “retains” and how effectively it does so, we can then assess a company’s earnings growth potential. Assuming everything else stays the same, companies that have both a higher return on equity and higher profit retention are typically the ones that have a higher growth rate compared to companies that don’t have the same characteristics.

A Side-by-Side Comparison of Galaxy Entertainment Group’s 11% Earnings Growth and ROE

First of all, Galaxy Entertainment Group appears to have a respectable ROE. Especially when compared to the industry average of 6.8%, the company’s ROE looks pretty impressive. As you’d expect, Galaxy Entertainment Group’s reported 24% drop in net income is a bit of a surprise. Therefore, there could be some other aspects that could explain this. These include low profit retention or poor capital allocation.

With this in mind, we compared Galaxy Entertainment Group’s performance to the industry and were concerned to find that while the company shrank its profits, the industry grew its profits by 12% over the same five-year period.

Earnings growth is an important factor in stock valuation. Next, investors need to determine whether or not expected earnings growth is already built into the stock price. This allows them to determine whether the stock’s future looks promising or threatening. Is Galaxy Entertainment Group fairly valued compared to other companies? These 3 evaluation criteria could help you decide.

Does Galaxy Entertainment Group use its profits efficiently?

Galaxy Entertainment Group’s low three-year average payout ratio of 20% (meaning it retains the remaining 80% of its profits) is a surprise when combined with declining earnings. The low payout should mean that the company is retaining most of its profits and therefore should see some growth. There could be other factors at play here that could potentially hinder growth. For example, the company faced some headwinds.

Additionally, Galaxy Entertainment Group pays dividends over a nine-year period, suggesting that management prefers to continue dividend payments even when earnings have been declining. Our latest analyst data shows that the company’s future payout ratio is expected to rise to 48% over the next three years. Separately, it is speculated that Galaxy Entertainment Group’s future ROE will rise to 16% despite the expected payout ratio increase. There could likely be other factors that could drive future ROE growth.

Diploma

Overall, it looks like Galaxy Entertainment Group has some positive aspects to its business. Still, the low earnings growth is a bit concerning, especially given that the company earns a high rate of return and reinvests a large portion of its profits. It looks like there may be other factors preventing growth that aren’t necessarily in control of the company. With this in mind, the latest industry analyst forecasts show that analysts are expecting a huge improvement in the company’s earnings growth rate. Are these analyst expectations based on overall industry expectations or on company fundamentals? Click here to go to our analyst forecasts page for the company.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.